This paper studies the potential effects on the Italian economy of various reformpackages in the spirit of the Europe 2020 strategy. Using the European Commission’smodel QUEST

III with R&D calibrated to match important features of the Italianeconomy, we provide a quantitative assessment of the possible effects in terms ofgrowth, employment, sustainability of public finances and external imbalances ofseveral knowledge-oriented, labor and product market reforms. We observe that labormarket reforms are likely to bring about sizable long-run gains in output andemployment and that most of these gains accrue to low skilled workers, while realwages tend to increase especially for

high skilled workers. Some interventions are likelyto have some transitional costs as they give rise to a temporary decline in consumptionand/or employment, but the simultaneous implementation of all reforms may tend tomitigate these effects already in

the medium run. As a result of higher growth, in the nocostly reform scenarios, the public debt-to-GDP ratio declines substantially. However,the analysis shows that non-budget neutral structural reforms may have considerableside effects on the external

imbalances.

JELclassification: E10, E60, E47.

Keywords:Europe 2020, Structural Reforms, Simulation Analysis, Italy.

1

We are very grateful to Werner Roeger, Janos Varga and Jan in’t Veld for sharing with us many

invaluable insightsabout their model, QUEST III. We also thank an anonymous referee, Alexandr

Hobza and Gilles Mourre and theparticipants to the LIME Modelling Workshop 2010 and to the

EcoMod2011 conference for useful comments.andsuggestions on an

earlier version of this paper. The

usual disclaimer applies. The views expressed herein are those ofthe authors and not necessarily